By George Leong, B.Comm. For Profit Confidential
It’s time to look at the charts again. The S&P 500 scored yet another record high of 1,759.33 on Tuesday and is now up over one percent from its mid-September high.
I must admit: the S&P 500 looks pretty good on the chart, driven by bullish sentiment and a desire to reach higher. The breakout appears to be holding, so 1,800 looks reachable by the year’s end. Of course, a lot will depend on whether shoppers spend in the upcoming holiday season and if the Federal Reserve starts tapering its bond buying.
For now, as shown by the long-term yearly chart of the S&P 500 below, you’ll notice the two plateaus highlighted by the horizontal blue line, which stretch from 1965 to 1980, when stocks did nothing, and from 2000 to the present. As shown on the chart, the S&P 500 staged an impressive breakout that resulted in a two-decade-long rally extending from 1980 to 2000, based on my technical analysis.
Back in 1985, the S&P 500 was trading at a mere 200 points. We are up nearly eight-fold since.
Now, is the S&P 500 headed for another extended breakout like the one it experienced more than 30 years ago? It could definitely happen, that is, if all the stars are aligned.
Chart courtesy of www.StockCharts.com
Perhaps we are in a state of utopia for the stock market—with steady growth, low interest rates, benign inflation, and cheap accommodative monetary policy.
But be careful before treading on. The problem I see is that we will likely need to see a bigger stock market correction than the recent five-percent correction by the S&P 500.
Take a look at the past two years on the chart below. There was a correction of about 10% in the S&P 500 in the second quarter of 2012, followed by another 7.5% adjustment in the fourth quarter (as indicated by the shaded ovals). Then there was the 6.5% correction a few months back.
With the S&P 500 now at another record high, another correction could be brewing on the horizon, as indicated by the final shaded oval in the chart below.
Chart courtesy of www.StockCharts.com
Of course, we may not see a correction until the stock market reaches higher. Once that point is achieved, say the S&P 500 at 1,800, then we could see a fallout, as the market realizes the economic and corporate growth are not that good and they don’t support the market gains.
The months of November and December will be interesting and stocks could go either way. Just make sure you take some profits off the table and cut some losses prior to year-end.
